Nobel for the Evident

Jean Tirole got this year’s Nobel for showing how to regulate big firms better. His work may be confusing to non-technical audience, but it makes millions of customers happier. When you pay your phone bills or mortgage, recall Tirole. Without him, these bills would be more expensive.

The Nobel committee published a summary, which also explains how economics relates to the real world. This point is not evident even to graduate students in economics, because professors pay attention to techniques of, not motivation for, economic analysis. Like education in general.

A relevant example from the summary. The 2008 crisis was triggered by the shift in the quality of financial assets. Assets that seemed safe were not so. But market participants were unsure which ones. Sellers knew their assets better than potential buyers. Buyers expected sellers to put toxic assets on market first, and no one wanted to buy suspicious property. The market would be still when sellers needed cash and other things in exchange for their (perhaps) good assets.

The government had to intervene to prevent the negative impact on the economy. What should it do? Whose assets to save first? In less fortunate countries, the answer was evident: the assets of public officials’ friends. That’s not the best choice, unless the friends had the worst assets, which Jean Tirole recommends to buy first. Then the government should provide financing to the owners of mediocre assets, without buying the assets themselves. In the end, according to Tirole, only high-quality stuff remains on the market, so normal buyers are no longer afraid to act.

Sure, “it’s evident.” But on the way to the evident you need to reject hundreds of other evident hypotheses. Second, you need to prove it. Not just few facts leading to a desirable conclusion, but a coherent model that prevents tricks like 2+2=5 in reasoning (happens more often than many think). It matters for those billions of people who suffer from very confident policymakers who know everything without proofs.

In other words, the committee awards the Prize for the path, not the result. And even a great path needs some explanatory background to appreciate it fully and demand something similar from those who make key decisions.

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